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A Massacre at 901 South Central Expressway

Whether it was Colonel Mustard in the library with the candlestick holder or Mr. Green with the rope in the kitchen is meaningless; there was a massacre at 901 South Central Expressway in Richardson, Texas, yesterday and Fossil (Nasdaq: FOSL  ) shareholders are feeling as though they've been stoned without a trial.

I can't recall the last time I saw a company's shares so completely taken to the woodshed for such a small reduction in its full-year forecast. For the quarter, Fossil reported an 11.1% increase in sales based on constant dollars, and a profit of $0.93, which was up 8% over the year-ago period. These results came in marginally ahead of Wall Street's expectations. But as soon as Fossil mentioned that it was beginning to see a slowdown in European sales, investors began diving out of their first-story windows en masse.

In management's own words: "[In] Europe, a softening macro environment toward the end of the First Quarter and changes in our merchandising and assortment strategies across certain categories negatively affected both our wholesale and retail sales in that region."

This statement effectively wiped out $2.9 billion in market value and caused Fossil's stock to free-fall 37.6% after it lowered its full-year forecast to a range of $5.30-$5.40 from Wall Street's consensus estimate of $5.56. Even giving short-sellers, doomsayers, and naysayers the benefit of the doubt, it means Fossil dropped the ball on Wall Street's expectations by 4.7% if it logs $5.30 in EPS for the year. Since when does a 4.7% earnings warning, when compounded by double-digit revenue growth, merit a 37.6% haircut?

Furthermore, why high-end luxury retailers hit the deck today in response to Fossil's marginal miss is beyond me. The shelling Michael Kors (Nasdaq: KORS  ) took in response to Fossil's stoning made partial sense because Fossil makes watches for Michael Kors that it then rebrands under the Michael Kors name -- but what about everything else? Fossil is a low-end to mid-tier price point retailer and is in no way indicative of the spending trends of luxury consumers in Europe.

Movado Group (NYSE: MOV  ) , for instance, collapsed nearly 10% on the Fossil news despite the fact that Movado's watches are considerably higher in price and more fashion-targeted than Fossil's -- not to mention that Movado's earnings report last month crushed Wall Street's estimates. Coach (NYSE: COH  ) , a watch and luxury handbag designer, shed more than 5% at one point yesterday in response to Fossil's drop on fears that its European sales would slow. Mind you, this is just two weeks after Coach raised its full-year forecast and dividend due to strong demand for its products. Even apparel maker Polo Ralph Lauren (NYSE: RL  ) sank as much as 8.6% at its worst yesterday on fears that weak European demand would saddle its bottom line. If you recall, this is the same company that in February reported a 17% increase in sales and easily sailed by Wall Street's consensus estimates.

The idea that there's any correlation between Fossil's earnings and any of these stocks seems absolutely preposterous at the moment. In addition, the massacre that Fossil shareholders endured despite the marginal haircut in EPS seemed equally as ridiculous.

One way or another, cooler heads will prevail in this scenario and I would highly encourage you to take a closer look at Fossil. Following the drop, it's now valued at just 14.7 times fiscal 2012's earnings and less than 12 times forward earnings with a sales growth rate still healthfully in the double digits. The company's purchase of Skagen should help boost sub-$100, high-margin watch sales, and I feel you'd be foolish to ignore Fossil's historical outperformance.

Disagree with me? Tell me about it in the comments section.

If you'd like the inside scoop on three more companies that should be raking in the profits regardless of Europe's economic situation, then click here for your free ticket to our latest special report. And yes -- I did just say "free"!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. The last time he owned a Fossil watch, he was 10. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Fossil and Movado Group. Motley Fool newsletter services have recommended buying shares of Fossil and Coach, as well as shorting shares of Fossil in a separate newsletter service. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always on time.

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10/28/2016 4:00 PM
FOSL $26.49 Down -0.09 -0.34%
Fossil CAPS Rating: ****
COH $35.72 Up +0.20 +0.56%
Coach CAPS Rating: ****
MOV $21.75 Up +0.25 +1.16%
Movado Group CAPS Rating: ***
RL $98.14 Up +0.31 +0.32%
Ralph Lauren Corp CAPS Rating: ***